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SCOREBOARD: European pantomime

Markets took a strong 'risk off' stance overnight as sabre rattling over European bailouts continued.

For a night where there was no news or dataflow to speak of we saw some solid moves. All on the downside I should add, as markets switch into ‘risk off’ mode. It’s a flick of a switch these days and we saw some big moves, especially on the European bourses. Check it. The Dax was smashed falling 3.2 per cent, the CaC was down 2.9 per cent while the FTSE fell 2.1 per cent. All the major indices actually underperformed Spain’s main index, which was off only 1.1 per cent. In fact Bankia, one of the large problem banks, ended 7 per cent higher! It's fair to say at one stage the Spanish market was down about 5 per cent, but then the regulator came in and banned short-selling, also explaining that gain for Bankia. And well, that definitely seemed to sort things out. The Italians did the same as well I might add, but their key index followed the majors, falling 2.8 per cent.

It’s all about the European pantomime naturally, what with the troika sabre rattling over Greece and the market seemingly oblivious to the fact that the sign off on Spain’s €100 billion bank aid was given on Friday. For the Greeks, it’s the usual game of chicken that we see nearly every time another instalment comes up. Someone mentions the word 'exit', there’s talk about them not getting any more cash etc. It’s tired. They’ll get the cash and while they may fall behind on reforms, reforms are being carried out. Note that the IMF responded to a recent press article suggesting they were unwilling to continue funding Greece, by stating officially they continue to support Greece.

As for Spain? Well, remember that on paper Spain would never have had any need of a bailout. You look at their metrics and you couldn’t reasonably come to that conclusion. But people are and have, largely because they don’t bother looking at their metrics and just go with the flow, often talking about things they know nothing about – and that’s just economists. It’s dangerous when the debate reaches the uninformed stage. Everyone’s got an opinion, usually based on not much, but it has real consequences. Think about Australian economic debate recently – the non-mining recession etc. It's a perfect example of the uninformed debate.

It’s the same situation in Europe, but responding to it has unfortunately become all too rational which is why, despite Spain’s banks getting €100 billion in aid, Spanish government yields have shot up since. The insanity is in the circularity, as I have mentioned numerous times before. Spain is not insolvent, not even close, but people treat it as if it was. So just last night the yield on Spanish 10-years pushed up another 7bps or so to 7.5 per cent before easing back down to 7.44 per cent. Italian 10-years hit 6.4 per cent (then eased off to 6.32 per cent) and for what reason? Is Valencia in Italy? Catalonia? (Of these two regions of Spain, one has requested aid from the central government and the other widely tipped to do so). How does it end? Well the Spaniards want the ECB to print and realistically, the higher yields go the more likely they will do this. That’s the end game, people, that and much more regulation. Not the break-up of the eurozone. That isn’t going to happen. In all seriousness, if you want to know the probability of a euro exit, talk to a European lawyer not an economist.

Across the Atlantic, Wall Street also took a beating but it wasn’t quite up there with Europe. Maybe because this earnings season isn’t as bad as expected. But whatever the case, the S&P500 ended 0.9 per cent weaker (1350), the Dow was off 0.8 per cent (12721), while the Nasdaq fell 1.2 per cent (2890). Commodities too weakened and crude was down 1.3 per cent (-4 per cent at the low), with copper off 2 per cent while gold fell almost $7 to $1576.

Price action elsewhere was reasonably subdued. US treasuries did little, the 10-year trading within a 4bps range, with yields actually pushing a couple of basis points higher to 1.43 per cent. The 5-year was otherwise at 0.56 per cent and the 2-year at 0.21 per cent. Aussie futures in turn were little changed with the 3s at 97.9, and the 10s at 97.31.

Then for forex, the Australian dollar was down about 90 pips to 1.0262, and the euro rose about 20 pips to 1.2120, while sterling is at 1.5512 and yen at 78.38.

That’s pretty much it. So looking at the day ahead it probably won’t be a great day for our stocks and the SPI suggests the market might be 0.4 per cent weaker. Otherwise, we get a speech from the RBA governor, titled 'The Lucky Country' at 1305 AEST. Just prior to that at 1230 AEST we get a ‘flash’ estimate of China’s PMI, largely useless for analysis but it does get press. Tonight we get the European PMIs and the Richmond Fed manufacturing index.

Have a great day…

Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

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